Chapter 3 Chapter 3 A Brief History of Democratic Capitalism
The rise of the winner-take-all economy represents a decisive break with our not-too-distant past. But the shifts in government’s role chronicled in the last chapter are hardly the first of their sort. Indeed, our nation’s public life has been marked by similar periods of gridlock and deference to economic power in the past. It has also been marked by dramatic moments of political renewal, in which seemingly immutable stalemate and rampant solicitousness toward the top have been overturned through the concerted efforts of political reformers.
The present chapter is about this historical back-and-forth. It is the necessary link between the identification of American government as our prime suspect and the explanation, in parts 2 and 3, of exactly why American government did it. For the history of America’s particular form of democratic capitalism not only helps us better understand why elected politicians might choose to respond to the select top rather than the broad middle—contrary to the predictions of democracy’s greatest theorists both ancient and modern. It also contains some big clues about what has happened to American politics since the 1970s.
“The Oldest and Most Fatal Ailment of All Republics”
It would be nice to think that the story of government-promoted enrichment of the rich that we told in the last chapter is a freak departure from the normally happy interplay of American democracy and American capitalism. It would be nice, but it would be wrong. Political and economic freedom do tend to go together, and American democracy and American capitalism have had many happy moments. But democracy and the market are in tension with each other, too—and American democracy and American capitalism are no exception.
The root of the tension is simple. Democracy is based on the ideal of political equality. Every citizen is supposed to have the same potential to influence what government does—even if, in practice, some may choose not to exercise that potential or exercise it poorly. Money should not matter in this calculus: the rich and poor are equal before government—“all men are created equal.” In the marketplace, by contrast, money matters a great deal. Markets respond to what economists call “effective demand”—that is, preferences backed by dollars. The rich and poor may be equal politically. They are not equal economically.
The tension arises when the contrasting features of democracies and the market come into conflict, as they routinely do. Markets notoriously under-produce (or don’t produce at all) “public goods” that are shared in common, such as unpolluted air, safe streets, a system of law, and well-paved roads. They falter in the presence of positive or negative “externalities,” benefits or costs that accrue to those outside a market transaction (think toxic waste or the positive social effects of a child’s education). And markets frequently trample on valued social priorities about which large numbers of citizens care deeply—from clean water to the just treatment of workers to, yes, the fair distribution of economic rewards.
When markets operate in damaging ways, the natural temptation is to turn to politics to correct the imbalance. And yet market participants have strong incentives to resist government regulation and democratic intervention. What’s more, they usually have considerable resources to do so. Without strong protections of political equality, without firewalls between the market and democracy, those who have the most power in the market may also have the most power in politics, undermining the basic ideal on which democracy rests.
Since the first stirrings of democracy, virtually all its greatest theorists have recognized this. From Aristotle to Alexis de Tocqueville, from Plato to Thomas Paine, those who have contemplated what makes democracy tick have invariably expressed concern about its coexistence with sizable gaps in economic standing. The Roman priest Plutarch set the tone when he noted, “An imbalance between rich and poor is the oldest and most fatal ailment of all republics.” Charles de Montesquieu, whose The Spirit of the Laws was a central text for many of our nation’s Founders, identified “real equality” as “the very soul of democracy,” though he conceded that in practice democratic republics could only “fix the differences to a certain point.”1
To these thinkers, the danger of class divisions was the prospect of “‘perverted’ forms of government,” in the words of the political theorist Michael J. Thompson, in which “the few ruled over the many and the public good was trampled by the wealthy, powerful, and elite.” As Thompson explains, the ancients and their Enlightenment heirs believed that preservation of democratic practices “required… not a utopian form of equality but a set of institutions and laws—and hopefully a civic culture as well—that would limit the excesses of wealth and property.” No less an Enlightenment realist than David Hume observed that “[w]here the riches are in a few hands, these must enjoy all the power and will readily conspire to lay the whole burden on the poor, and oppress them still farther, to the discouragement of all industry.” After noting the risks of great inequality to democratic institutions in The Spirit of the Laws, Montesquieu argued that “to men of overgrown estates, everything which does not contribute to advance their power and honor is considered by them as an injury.”2
It should be little surprise, then, that in the late eighteenth century this risk had a profound effect on the deliberations over the construction of a new American republic. Despite their diverse views, the architects of American political institutions shared the assessment that deep class divisions threatened to undermine democracy. Madison famously justified America’s fragmented constitutional structure as a means of curing the “mischief of faction,” so it is notable that he believed “the most common and durable source of factions has been the various and unequal distribution of property.”3 Reacting against the feudal traditions of Europe, the Founders were acutely aware that differences in property engendered conflicting demands and differing capacities to achieve those demands. They feared the fledgling American republic could not long survive if class differences grew or hardened.
This was one reason why the Constitution included what were, at the time, extremely limited property qualifications for voters and—in a dramatic break with most states’ practices—no property qualifications for elected representatives. In Federalist #39, Madison made clear that the new American republic would be a “government which derives all its powers directly or indirectly from the great body of the people,” not aristocratic privilege or hereditary right.4 As the constitutional law scholar Akhil Amar points out, “Although some modern readers have tried to stress property protection rather than popular sovereignty as the Constitution’s bedrock idea, the words ‘private property’ did not appear in the Preamble, or anywhere in the document for that matter.” (Indeed, Amar notes that the only reference to property is one reference to “government property.”)5 For all its limits as a democratic document, the Constitution embodied a broad rejection of property-based restrictions on citizen participation.
The Founders were not radical egalitarians by any means. Rather, they were keen students of political economy. They saw the new American republic as marked by a highly favorable starting point. The New World had land—the critical economic resource of their time—in abundance. This abundance produced a distribution of property much broader than that found in the class-bound Old World. And many of the Founders were convinced that preservation of this broad distribution was not just good in itself but essential to the institutional functioning of democracy. The risk was not just challenges to private property from below, but also challenges to democratic equality from above. These were the Scylla and Charybdis of democratic capitalism: on the one side, mob rule by propertyless democratic majorities; on the other side, oligarchic rule by the affluent. By understanding these twin perils, we gain a better sense of why American politics has veered toward the latter danger in recent decades.
Government of the Poor?
Will voting majorities use their political power to tax away the property of the wealthy? Or will the rich use their economic power to twist democracy to their own ends? Among the Founders, John Adams was perhaps the most clearly worried about the first possibility. If political equality was pursued too far, he warned, “Debts would be abolished first; taxes laid heavy on the rich, and not at all on the others; and at last a downright equal division of everything be demanded, and voted.”6 Yet it was the brilliant Frenchman Alexis de Tocqueville who made the point most articulately in his 1835 masterwork Democracy in America. As Tocqueville observed, “In all the nations of the world, the greatest number has always been composed of those who did not have property, or those whose property was too restricted for them to live in ease without working. Therefore universal suffrage really gives the government of society to the poor.”7
And what would the less affluent do with “the government of society”? To Tocqueville, it was obvious: They would happily tax the rich to provide benefits to themselves. Echoing recent conservative complaints about the redistributive proclivities of those the Wall Street Journal has called “Lucky Duckies”—that is, voters so poor they don’t pay income taxes and thus don’t mind raising them—Tocqueville concluded: “The government of the democracy is the only one under which the power that votes the taxes escapes the payment of them.”8 In other words, the less affluent majority could use its political power to expropriate the rich.
Tocqueville’s observation has received modern expression, with an optimistic twist, in leading theories of income redistribution offered by political scientists.9 These theories are premised on the observation that the decisive swing voter in a democracy (the “median voter”) almost invariably has an income lower than the average income in society. Yet this relative lack of material resources belies the median voter’s political influence. As the last and decisive voter to join the majority in favor of a candidate or party, the median voter ultimately drives what politicians do. And because the median voter’s income is below the average income, the theories predict that politicians seeking the median voter’s all-powerful vote will redistribute income through government.
Of course, the median voter won’t seek all the rich’s riches. At a minimum, the median voter has to worry about removing the incentive of the rich to work—killing the goose that lays the golden egg, so to speak. Middle-class voters might also think it possible that they, too, will someday be rich—though, on the other hand, the rich also have to think about the possibility that they might someday be middle class. But the basic point holds true: When inequality in incomes goes up, these political-science models predict that the median voter will seek to reverse the balance. The dual dangers of runaway inequality and excessive redistribution will be held in check. Like a house’s thermostat, whenever things get too hot (rising inequality) or too cold (poor economic performance), democracy’s median voter will force a correction.
It is a decidedly optimistic view, but alas, optimistic does not mean accurate. Over the last generation, we have seen a massive increase in inequality. And this inequality has taken a form that’s particularly puzzling from the standpoint of the theory: The vast majority of Americans have fallen further and further behind a tiny superrich segment of society. If people care about their relative economic standing in the way that these theories suggest they should, we should already have seen a major increase in government redistribution.
Yet, as we saw in the last chapter, the trends of the last generation have been exactly the opposite. Inequality in what people earn has skyrocketed. But instead of offsetting this rise, government taxes and benefits have actually exacerbated it, an outcome witnessed in virtually no other nation. And when we look beyond the highly visible redistribution that occurs through government taxes and benefits, the picture grows even starker. In a range of areas, from labor law to financial market regulation, public policy has reshaped the economy to favor those at the top. Far from “soaking the rich,” elected political leaders have treated the rich more solicitously than ever, even as the rich have grown massively richer at the expense of the majority.
To begin to grasp why the rich have had the political upper hand—contrary to the prediction of Tocqueville and his political-economy heirs—we need to travel back almost a century to examine the other side of the interplay between democracy and the market.
Progressives’ Problems
Our generation is not the first in which the optimistic prediction that democracy will naturally temper excesses of income and wealth has failed to ring true. In the early twentieth century, similar problems—and laments—were widespread. Financial and industrial titans commanded vast economic power that they used not just to despoil the environment, suppress workers’ attempts to organize, and head off consumer protections, but also to buy off politicians who might stand in their way. The problem was particularly acute in the U.S. Senate, whose members were still appointed by state governments. The legendary journalist William Allen White portrayed the institution as a “millionaires’ club,” where a member “represented something more than a state, more even than a region. He represents principalities and powers in business. One Senator… represents the Union Pacific Railway System; another the New York Central; still another the insurance interests of New York and New Jersey.”10
These problems did not go unnoticed—by citizens or by the reformers of the time, who called themselves “Progressives.” Progressive thinkers had many concerns: environmental degradation, monopolies stifling competition, ill-treated workers. Yet what worried them most was the distortion of politics by private economic power. As Theodore Roosevelt summed up the critique in 1912:
The true friend of property, the true conservative, is he who insists that property shall be the servant and not the master of the commonwealth; who insists that the creature of man’s making shall be the servant and not the master of the man who made it. The citizens of the United States must effectively control the mighty commercial forces which they themselves have called into being… The absence of effective state, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power.11
Like the ancients’ worries about oligarchy, the Progressive critique centered on the threats to political equality posed by the excessive concentration of property and economic power. And yet, by the early twentieth century, the concern took a new, more modern form: the classical fear of a hereditary aristocracy had been replaced by a concern with the depredations of large-scale industrial capitalism and the distortions created by financial speculation. By the time TR spoke of controlling “the mighty commercial forces,” Progressives had zeroed in on bigness and the banks as the great challenges to democracy of the day.
Indeed, in the very year of Roosevelt’s fiery speech, “the money trust” became the focus of highly publicized congressional hearings that revealed widespread abuses in the banking industry. It then became the subject of one of the most important muckraking works of the era, Other People’s Money, and How the Bankers Use It—a damning indictment of the “financial oligarchy” that increasingly dominated industry and government.
The author of Other People’s Money was Louis Brandeis, the towering legal thinker who would later become a Supreme Court justice and head of the American Zionist movement. In 1912, however, Brandeis was in his fifties (he would live into his eighties) and had already gained national prominence as a skilled legal advocate on behalf of Progressive causes. He had served as lead counsel for the plaintiffs in the landmark case Muller v. Oregon, in which the power of states to regulate the workplace to protect women workers was upheld. Brandeis jumped from cause to cause—he had a role in nearly every facet of Progressive social reform—but his activities were united by an abiding conviction that, in the words of his biographer Melvin Urofsky, “in a democratic society the existence of large centers of private power is dangerous to the continuing vitality of a free people.”12
Other People’s Money highlighted the perils of handing too much of that private power to those who controlled the lifeblood of capitalism. “The economic menace of past ages,” Brandeis later told a journalist, “was the dead hand which gradually acquired a large part of all available lands”—the fear of feudal privilege voiced by the Founders. “The greatest economic menace today,” he continued, updating the classical republican worry, “is a very live hand—these few able financiers who are gradually acquiring control over our quick capital.”13
Brandeis’s argument gained power from an early twentieth-century school of thought known as legal realism.14 Legal realism challenged the common notion, frequently invoked by those advantaged by the economy, that the structure of the market and the division of its gains was a natural phenomenon, completely separate from politics and government, the result of free choice and unfettered competition that yielded a distribution of property based on merit and hard work. The legal realists countered that property and markets were instead deeply intertwined with politics and government. There are no pre-political markets. Markets are inevitably shaped and channeled by political forces, dependent on the rules that are created and enforced by those who control the coercive power of the state. The laissez-faire vision of the economy held up in the Supreme Court’s 1905 decision in Lochner v. New York was a political choice, one with distinct, sometimes brutal consequences, and one that required a great deal of government intervention to emerge and survive.
That markets are constructed through public policies and shaped by politics—and therefore could be reshaped to produce better outcomes—was a central observation of Progressive reformers. It was also a central observation of our last chapter, in which we argued that government construction of markets remains among the most significant, and often least recognized, areas of public policy. So it is important to understand what the observation means and does not mean. It does not mean that democratic politics always produces well-functioning markets, or that government intervention is always justified or desirable. Rather, it means simply that, for good or ill, democratic politics makes markets. The debate should not be over whether government is involved in the formation of markets. It always is. The debate should be over whether it is involved in a manner conducive to a good society.
For the Progressives, the answer to that question in the early twentieth century was no. Policies passed in the name of free commerce frequently created markets that were mainly in the interests of a narrow economic elite. Efforts to address these inequities were blocked in legislatures highly attentive to business concerns. Where laws promoting social reform were passed, they were thrown out by the courts. Lest this critique be seen as deeply radical in spirit, it is worth quoting a little-noticed passage in Adam Smith’s 1776 The Wealth of Nations, now viewed as the bible of limited-government free-market economics. “Wherever there is great property,” Smith wrote, “there is great inequality… Civil government, so far as it is instituted for the security of property, is in reality, instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.”15 (Smith, a resolute skeptic about the rationality of unfettered financial markets, also authored the phrase “other people’s money,” which titled Brandeis’s famous work.) A clearer statement of the legal realist view of a century and a half later would be hard to find.
In short, property and markets rest on government and law. And, in the Progressive critique, they had to be restrained and limited by government and law. Without such restraints and limits, greater economic inequality would lead to greater political inequality, which in turn would lead to government policies that reflected the interests of those at the top. Swamped by the tides of inequality, democracy would give way to oligarchy—the very concern that recent economic events have cast in stark relief.
The Politics of Drift
In 1914, the twenty-five-year-old Walter Lippmann summed up the intellectual foundations of the Progressive Era in a three-word book title: Drift and Mastery. The “drift” of which Lippmann wrote, like the drift of which we wrote in the last chapter, was the failure of government to respond to new economic realities.16 The solution, according to Lippmann, was not to do away with modern industrial capitalism, with all its astonishing benefits as well as its dismaying costs. The answer was to tame it by asserting democratic supervision over its activities—to “master” it, in Lippmann’s words. Lippmann knew this was an imperfect solution given the distortion of politics by money that was all around him. But it was the only solution. “That is the way democracies move: they have in literal truth to lift themselves by their own bootstraps,” Lippmann wrote. “Those who have some simpler method than the one I have sketched are, it seems to me, either unaware of the nature of the problem, interested only in some one phase of it, or unconsciously impatient with the limitations of democracy.”17
Lippmann’s contrast of “drift” and “mastery” provides an apt dichotomy for the seesaw evolution of democratic capitalism in the United States. Since the emergence of modern capitalism, American politics has repeatedly oscillated between the politics of drift and the politics of renewal—between long periods in which curbs on economic inequality and market power remain largely off the agenda and dramatic periods of reform in which markets and inequality have come under intense scrutiny. In the first phase, economic dynamism outpaces the capacity of governing institutions. In the second, challenges to a political order that is viewed as corrupt and biased overcome, at least partially, the slow-moving structure of American governance to produce reform.
The main reason for this recurrent pattern is straightforward: In American politics, it is hard to get things done and easy to block them. With its multiple branches and hurdles, the institutional structure of American government allows organized and intense interests—even quite narrow ones—to create gridlock and stalemate. First, there is the famous division of governing authority into three separate branches with overlapping powers. Next, power is divided not just horizontally but vertically, with states and the federal government sharing and competing for authority. Add on top of this the high supermajority hurdles that legislation must sometimes clear. If the president vetoes a bill, for example, two-thirds of members of both houses of Congress must vote to override, a hurdle that requires unusual consensus among members of Congress about the need for change.
And then there are those two houses of Congress, with different election calendars, different constituencies, different procedures, and different numbers of members. The more clubby Senate, of course, bases its smaller membership on state boundaries, so sparsely populated Wyoming (population: 532,000) has the same number of senators as crowded California (population: 36.7 million). The results are predictable and have been well documented: The weight of rural interests—including the agricultural sector and extractive industries located in low-population states—is magnified. The weight of urban areas and ethnic and racial minorities—packed as they are into high-population states—is reduced.18 Moreover, the need for agreement between two quite different chambers makes consensus over policy change significantly harder to achieve. Fragmented political institutions in which “ambition checks ambition,” in Madison’s famous phrase, are not designed to encourage dramatic social reform.
It is worth stressing that, in many ways, this system is far more convoluted than what the Founders intended. Many of the protections for sparsely populated states that thwart majorities were seen by Madison and others as a bug, not a desired feature. In a context where existing states needed to ratify the proposed Constitution, they were concessions to political practicalities. Indeed, as the political theorist Robert Dahl has stressed, the political leaders at the Constitutional Convention came very close to approving a design that would have allowed Congress to choose the president, an outcome that would have yielded something much closer to the more streamlined parliamentary systems used in most modern democracies.19
As we will see in the chapters to come, many of the biggest contributors to contemporary stalemate are not features of the original design at all, but have developed in conjunction with that framework as society has changed over the intervening centuries. The filibuster, which has become an increasingly prominent source of gridlock, is a Senate practice unmentioned in the Constitution. And partisan polarization, which has mixed with the filibuster to form a potent cocktail of political obstruction, is the outgrowth of a development—the creation of parties—that most of the Founders hoped to prevent.
Other hurdles, too, grew out of the evolution of American society since the time of the Constitution’s creation. The malapportionment of the Senate, for instance, worsened dramatically over time as newer states with small populations were admitted to the union. In 1810, the minimum percentage of the population that could elect a Senate majority was 33 percent. In 1970, it was 17 percent, roughly where it is today.20 In cross-national perspective, the U.S. Senate is one of the most malapportioned upper chambers in the world, ranking just behind Argentina, Brazil, Bolivia, and the Dominican Republic.21 Needless to say, it is surely the most powerful upper chamber that is so skewed.
It is not just the capacity for obstruction that has grown over the long life of our democracy. So, too, have the consequences of that obstruction. The Founders designed the Constitution in an overwhelmingly agricultural society. At the time, the dynamism of an industrial economy—as well as the social challenges it would create—was difficult to imagine (although some key figures like Alexander Hamilton anticipated some of it and tried to harness a strong national state to bring it about). The potential failure of government to act decisively in the face of dramatic economic change was simply not at the top of the Founders’ list of concerns.
And yet this very same institutional structure was designed to be highly democratic for its day—and it has become more and more democratic over time. Multiple venues create not just veto points at which change can be blocked, but also access points where a multitude of interests and groups can press their claims. The result is a system that simultaneously calls forth powerful demands from “We the People” and makes efforts to achieve those demands frustrating, halting, and sometimes impossible.
Indeed, perhaps no other period better captured these contradictory forces than the Progressive Era. Despite the ferment of reform, Progressives fell far short of bringing about Lippmann’s “mastery.” Important political reforms occurred, including a constitutional amendment requiring the direct election of senators. New regulatory agencies were created, and a number of key social reforms passed at the state level. But the reform movement split politically—literally so, when Theodore Roosevelt ran unsuccessfully for the presidency as the Progressive Party candidate, challenging Democrat Woodrow Wilson, a weaker champion of the cause.
Like the split within the Progressive ranks highlighted by TR’s independent run, some of the Progressive reformers’ wounds were self-inflicted. Elite-oriented political reforms that emphasized informed, independent political participation undermined the vibrant, though highly corrupt, party democracy of the late nineteenth century and gave cover to poll taxes and literacy tests for voting that gravely restricted the franchise. In the words of the sociologist Michael Schudson, Progressive Era reforms “helped free people from parties” deeply corrupted by patronage and private interests, but “also provided new means to exclude some people from voting altogether.”22
Yet the greater source of injury to the cause was organized, entrenched opposition. On a host of fronts—workers’ rights, health and unemployment insurance, old-age pensions—Progressive campaigns ran headlong into fierce counter-campaigns by business interests. At a time of weak, immobilized national government, opponents took advantage of America’s decentralized federalism to play one state off against another.23 Strong and intensely conservative courts struck down reforms on those infrequent occasions when Progressives succeeded in running the legislative gauntlet. The Progressive Era ultimately gave way to the Roaring Twenties of unbridled capitalism, market celebration, and industry-dominated politics.
It also, of course, gave way to the Great Depression—a sequence that now seems eerily familiar. And if the travails of the Progressive Era and complacency of the Roaring Twenties provide a series of powerful clues about why, since the 1970s, American government has proved so stalemated and complicit in the face of rising inequality, the reforms that emerged out of the crucible of the Great Depression provide the clearest indication of what it takes to bring about substantial reforms of governance to master new economic realities.
For too many of us the political equality we once had was meaningless in the face of economic inequality. A small group had concentrated in their own hands an almost complete control over other people’s property, other people’s money, other people’s labor—other people’s lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.
Against economic tyranny such as this, the American citizen could appeal only to the organized power of Government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people’s mandate to end it. Under that mandate it is being ended.
—Franklin Delano Roosevelt, accepting his renomination, 1936.24
The Great Depression represented the failure of a philosophy that said that the market, left alone, would right itself and that the pain inflicted on workers and their families was the necessary condition of recovery. The classical view of the market held by many economic elites at the time—and widely held again today—distilled Adam Smith’s relatively nuanced view of markets and human nature down to its free-market vapors and then mixed it with a Calvinist social Darwinism that saw economic success as a sign of superior personal character (and the reverse as a sign of individual moral failing). The year after the stock market crash of 1929, Treasury Secretary Andrew Mellon was still calling for get-tough measures—“Liquidate labor, liquidate stocks, liquidate real estate”—to allow “enterprising people” to “pick up the wreck from less competent people.”25
Meanwhile, as the unemployment rate climbed toward 25 percent, the president of the National Association of Manufacturers asked rhetorically of the growing numbers of jobless: “If they do not… practice the habits of thrift and conservation, or if they gamble away their savings in the stock market or elsewhere, is our economic system, or government, or industry to blame?”26 (Echoes can be heard in the words of a CNBC commentator who, on the floor of the Chicago Mercantile Exchange in 2009, launched a tirade against “the government… promoting bad behavior” by helping out “losers” whose homes were in foreclosure; the surrounding traders cheered.)27 The poverty of this view soon became abundantly clear, and with it, the limits of the relatively weak federal government and money-dominated politics that had previously reigned.
What emerged, of course, was the most concentrated burst of economic reform in American political history. The changes ushered in by the New Deal were neither as complete nor as unblemished as the most sympathetic chroniclers have suggested. (To cite one of the greatest blemishes, Roosevelt spent little of his political capital on the cause of civil rights, acceding again and again to the demands of Southern Democrats for accommodation of the region’s embedded and elaborate system of racial hierarchy.) But collectively the New Deal reforms stand as the paradigmatic example of the politics of renewal. Banks were regulated and consumer deposits insured. The securities industry was placed under tight new restrictions. Taxes were levied on the rich and raised over time to fund public programs in support of the unemployed and destitute. A brief, ill-fated attempt at government-sponsored self-regulation in the form of the National Industrial Recovery Act—mercifully killed by the Supreme Court not long after its creation—gave way to more aggressive regulation of business.
Roosevelt’s economic officials also gradually embraced increased public spending to boost the economy—the priming of the pump that the British economist John Maynard Keynes was simultaneously advocating, initially to deaf ears. Critically, they bolstered middle-class democracy by supporting measures that gave unions—stymied by the courts and a hostile federal government in the past—greater ability to organize and bargain. Programs of economic security, from old-age insurance to unemployment benefits, gave those newly empowered workers basic economic protections that few had previously enjoyed.
When the New Dealers reached for the rhetorical stars, they cast their program as part of a broader movement toward human flourishing and democratic liberty. (Secretary of Labor Frances Perkins went so far as to portray the social insurance breakthroughs of the 1930s as “a fundamental part of another great forward step in that liberation of humanity which began with the Renaissance.”)28 The end result was a new economic order—built on the conviction that the federal government had a responsibility to stabilize the economy, provide economic security, and ensure at least a modicum of redistribution from rich to poor.
The reforms were not just economic, but also political—a remaking of core constitutional understandings.29 Though Roosevelt suffered politically when he threatened to “pack” the recalcitrant Supreme Court with new members sympathetic to an activist federal government, the Court relented in the face of his program. Roosevelt also recast the role of the president, building upon previous steps by Wilson (as well as the maligned Hoover) to expand the role of the executive in domestic policy. Federalism was similarly turned upside down, with the federal government assuming a more central role relative to the states. This transformation not only strengthened the capacities of public authority; it helped weaken the sway of business interests. They had long been the strongest voices in state capitols, thanks in part to fear on the part of political leaders that any new taxes or regulations would lead businesses to relocate to friendlier jurisdictions. At the national level, business lobbyists were weaker, and fears of capital flight were far less of an obstacle to economic and social reform.
And, of course, there were changes that did not rise to the level of new constitutional understandings. The Democratic Party captured Congress with overwhelming margins, where its majority status would become a near-permanent fixture for the next sixty years. Republicans were discredited and marginalized. Unions and other voluntary organizations flourished, with a new capacity to shape activity in the enlarging range of areas where government policy reached. In short, the New Deal came to describe not just a new economic order but also a new political order. This was fitting, because New Dealers were convinced, in the words of the historian William Leuchtenburg, that “the depression was the result not simply of an economic breakdown but of a political collapse.”30 Like the Progressives before them, what they sought was more than economic reversal; it was political renewal.
The words “breakdown” and “collapse” are not too strong because the starting precondition of the politics of renewal is crisis. The crisis can be massive and fast-moving, as it was during the Great Depression, or it can be deeper and slower to develop, as it was during the Progressive Era. But the large majorities required to bring about major reforms must be catalyzed. In addition, the politics of renewal demand leadership, and in the modern era that leadership has come from the White House. And finally, the politics of renewal require a political vacuum—a vacuum created by the loss of the opposition party in an election rout or the manifest failure of the governing regime (and usually both). By clinging, in fact or appearance, to a leadership stance out of touch with evolving realities—to gridlock and drift rather than renewal and mastery—the discredited regime catalyzes the reform movement that replaces it.
Waiting for Renewal
The health of American democracy has always depended on the politics of renewal, on periodic efforts to ensure that drift driven by economic changes does not cripple government and allow the powerful to steamroll the rest of us. The Progressive Era through which Lippmann lived was the first of three great reformist periods of the twentieth century. The New Deal marked the next. And we shall see in Part 2 that the “long 1960s”—which, for government, really stretches from 1964 to 1977—represents the third. Each of these moments of political renewal generated major public initiatives designed to address excesses, inequities, and failures associated with government’s inability to keep up with rapid social and economic change. In each case, a dynamic democracy tempered and civilized a dynamic capitalism.
Since the late 1970s, however, the politics of renewal has been on long-term hold. Instead, the winner-take-all economy of the last generation has realized the fear voiced by democratic theorists from the ancients through the Founders that the balance of governance would tip toward those with the greatest resources and economic might. Armed with the clues from our investigation, we now are in a position to explain why that fear has been realized.
There can be little doubt that government deserves to be our prime suspect. The DNA evidence reveals that the inequality explosion has taken the form of a dramatic pulling away of the rich, an outcome largely inconsistent with other leading theories. We have seen that government surely had the means to bring about this outcome, and that public officials seized on those means—through direct interventions in the form of taxes and benefits, through deliberate failures to act in the face of rapid economic and social change, and through the public restructuring of private markets. And we have learned that this sort of activity is nothing new. It reflects powerful tendencies rooted in our political institutions that have, at crucial junctures in the past, overwhelmed the strong pressures for greater equality that democratic politics can create.
But we have yet to tell the full story of how American politics came to slam closed the long era of shared prosperity and usher in the winner-take-all economy. Parts 2 and 3 tell this story, and in them, we find yet more surprises. The political sources of rising inequality lie not in the culture wars of the 1960s, but in the forgotten economic clashes of the 1970s. The reform spirit of the 1960s was not extinguished when Republicans captured the Oval Office in 1968, just four years after a stunning defeat. Instead, it was during the unsettled economic environment of the mid-1970s that the drift of which Lippmann wrote sixty years prior reemerged. And the source of the change was an organizational revolution few heirs of the New Deal saw coming—a revolution that would transform the rules of Washington seemingly overnight.